United Arab Emirates: Effects of the Economic Crisis on the Real Estate Industry
The recent financial crisis was considered by most economists as the worst since the 1930s great depression (Global Crisis Management Organization, 2009). Many stocks lost value, businesses closed down, people lost jobs, and nations were left in huge amounts of debts. The housing sector was among the most affected resulting in installed projects, foreclosures, and many vacant houses. Consumer wealth went down in trillions of dollars and there was a major decline in economic activities all over the world. Consumers purchasing power decreased and demand in the real estate industry went down too.
Effects in the UAE
The effects of the financial crisis were hard on different countries and sectors. Real estate was among the most affected industries, especially in the American, European and Asian markets. The UAE has been a haven for investors in the real estate industry. The industry has seen tremendous growth and is expected to remain so after the economy is fully recovered. The region has shown positive growth and proven to be among the most recovered economies from the crisis. Since the region is highly dependent on foreign investors, the effects of slowed economies in other regions crept in easily and fast.
“The economic crisis marked the end of high valuations of properties in the UAE region” (Trident Press Staff, 2010). The results were a sudden decrease in prices and low demand. The UAE region’s valuation process before this period put properties at a very high value raising their prices and allowing big profits for the sellers. As the crisis started to creep in, no buyers were willing to take risks worth the quoted amounts. The high prices created havoc in the market as there were no buyers. The only solution was to reduce prices bringing an end to the high valuation of the property.
Demand in the real estate industry was adversely affected. Since 2008 when the crisis began, the rush to buy off-plan properties in the region has slowed down. As opposed to the past years, investors consulted highly with property experts before purchases. In the past years, the region experienced high demand and off-plan purchases were high. The end-users could not afford property meaning that property was being traded by the bug investors who were willing to hold on to them until prices got better. There was no more drive for demand reducing the number of real estate transactions.
The UAE is heavily dependent on foreign investors and buyers. The crisis saw a reduced number of investment tourism. The number of visitors went down and even those who came only participated in sightseeing rather than buying. As many businesses closed down or reduced their number of employees, many expatriates returned home, further reducing the demand for housing. A decreased demand further lowered the prices, meaning that developers didn’t have the funds to build more houses. There have been fewer projects launched in the recent past than was anticipated.
The market was undeniably slow for three years and buying trends changed. Many end users opted to buy properties themselves rather than go through middlemen and banks to minimize cost. Since few people can afford property on a cash basis, the demand has been slowed since then but looks hopeful as the economy regains stability. Even those buyers who were willing to go through banks had a hard time since financial institutions were also struggling to raise capital.
The region’s oil industry was badly affected and it is the main source of funds that go into real estate development. High financial risks at the time affected the cost factor of a project. They included inflation, fluctuating tax rates, delayed payments, repatriation of funds, and foreign exchange rates (Oxford Business Group, 2010). In the UAE region, housing projects are mainly funded by foreign investors, making financial risks a big reality for the developers.
Most of the raw materials are also imported, meaning that foreign exchange rates play a major role in the total cost of projects. A big percentage of the professionals involved in construction are also foreigners and sometimes have to be paid in their currencies. Fluctuating oil prices and exchange rates, therefore, posed a major challenge for developers and made cost management even harder.
Evidence of poor performance
Major consequences evident in the UAE when the financial crisis hit and risks were not managed included late delivery of projects. Since that period, late delivery of the project has become a common risk in the UAE. Housing projects are becoming bigger and bigger and as a result, logistical, financial, and technical challenges increased. Expensive foreign expatriates to take care of such challenges increased the cost of projects making them more expensive and less attractive to buyers. Since most of the materials are imported, their availability and transportation are many times a challenge and as foreign markets remain unstable, costing is a major challenge.
The country’s infrastructure was adversely affected and slowed down making it hard to access some of the remote areas where materials are collected. Many housing projects are also affected by fluctuating foreign currencies, which have not yet stabilized, forcing developers to wait until rates are friendly enough to purchase materials (Oxford Business Group, 2010).
Another major consequence was increased operating costs. The amounts of money spent on projects in the UAE are staggering. Many times the intended budgets have to be modified to accommodate more costs caused by financial risks. The global crisis caused major fluctuations in foreign exchanges resulting in high buying prices. Since rent rates remain almost the same, the rate of return on projects has been slow. Slow rates of return discourage investors, slowing down the rate of housing development in the region.
Technical risks have in the past caused design and construction defects after completion. During and after the crisis, financial challenges made it hard for constructors to hire foreign expatriates, reducing the quality of professionalism involved in the projects. Big projects have had to be demolished halfway or after completion, causing major losses in the industry. Construction risks have also had major effects on the safety of the people of UAE, as well as property. Some buildings may not be able to withstand the strong winds periods and fire incidents arising from hot weather conditions.
Comparing the housing cost indexes between New York and Abu Dhabi in 2008 and the end of 2010, it is evident that the index went down during the period but is slowly going up. This is evidence that demand in the UAE region has increased taking prices up.
The housing cost index
Abu Dhabi/New York
|Type of dwelling||Number of bedrooms||Index Abu Dhabi/New York |
|Index Abu Dhabi/New York |
“Like any other market, the UAE is cyclical and the cycle is constantly changing” (International Quality & Productivity Center, 2010). The region is the newest international property market and is attracting a lot of attention internationally. The market is still considered under-supplied and prices keep on going up as a result of higher demand than supply. The economic crisis however changed the trend for a short period where demand was much lower than the supply.
Many people couldn’t afford homes as they had a hard time accessing funding. Investment tourism suffered a major blow and less capital was flowing into the region. The oil industry, the biggest source of income for the region, had reduced earnings affecting the region’s income levels.
An important lesson learned from the crisis is the need for preparedness in risk management. The recent economic crisis taught many developers the importance of mitigating risk in project delivery. Costs escalated, more projects needed time expansion, funding became a challenge, all these putting more pressure on the team to deliver quality at a less cost. When that was not possible, the projects were completed at high costs making them unfavorable for buyers.
The region has since recovered and the real estate industry is a beehive of activity. The country’s economic growth has remained healthy in recent years and inflation rates have been very stable, minimizing financial risks. The UAE’s housing construction industry has experienced accelerated growth in the last two years and is expected to remain vibrant, especially now as the global economy continues to stabilize. It is estimated that the industry will have an annual growth rate of about 20% from 2011 to 2013 (Redfern, 2010). From the lessons, risk management is becoming an increasingly important topic of research in the region.
Global Crisis Management Organization. (2009). Crisis management. Web.
International Quality & Productivity Center. (2010). Construction project risk management Asia: Effective strategies for identifying, forecasting and managing project risk. Web.
Oxford Business Group. (2010). The report Sharjah 2010. Bahrain: Oxford Business Group.
Redfern, B. (2010). UAE taking the lead on construction site safety. Middle East Business, 45(34), 456-567.
Trident Press Staff. (2010). UAE Yearbook 2009. Dubai: Trident Press Limited.